A revival of India's banking industry following the recent formation of a new, stable government is likely to be gradual, as per an industry report card, "Indian Banks Are Banking On The New Government For Revival," published by Standard & Poor's Ratings Services.

"We anticipate that the growth in stressed assets will recede in the next two to four quarters. Any material improvement in asset quality will lag economic recovery, corporate deleveraging, decisive steps to alleviate problem of stressed sectors, and some respite on interest rates," said Amit Pandey, Credit Analyst, S&P.

The report expects moderate loan growth for the Indian banking system because the investment cycle will take time to revive. A revival in the capital expenditure cycle is some time away because companies have to first recoup returns on their earlier investments.

"The profitability of most of the public sector banks we rate will remain modest in fiscal 2015 because of under-provisioned loan books and sizeable outstanding standard restructured loans," Pandey said.

Indian banks have sizeable capital needs to support growth and meet Basel III requirements, the report noted. The low capitalisation of some rated public-sector banks is likely to constrain growth of Indian banks. However, the increase in equity valuations for banks following the recent stock market rally will help some of these banks to raise equity and meet near term capital requirements.

“Our negative outlook on Indian banks reflects the negative outlook on the sovereign credit rating on India (unsolicited rating BBB-/Negative/A-3). We believe the standalone credit profiles and ratings on some Indian banks are sensitive to deterioration in their asset quality and erosion in capital and earnings,” S&P said in the report.

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